Implied volatility for sterling/U.S dollar options surprised option players this week by remaining low, despite news of the alleged planned terrorist attack on planes traveling between the U.S. and U.K. Thursday. One month implied volatility for the pair remained almost unchanged and "very much down," said one trader at 7.47%. Spot was also steady at USD1.9015. Another trader said the calm is indicative of a market dogged by low volatility across all major currencies and emerging markets (DW, 7/13).
"Because the police stopped the attack before it happened, it was business as usual," said one European trader, adding, "It's a bit strange really." He noted in comparison after the London bombings last July, cable swooned to USD1.7403 from USD1.75 in little more than a day.
One London-based trader said a large quantity of sterling puts were being bought with varying strikes, but most had maturities of less than one month and were out-of-the-money. In the spot market, sterling/U.S. dollar was trading around USD1.90, from USD1.89 on Wednesday. "We haven't broken USD1.91 but already people are looking at hitting the USD1.92 barrier on the top-side," said the trader.
Trading officials said the delivery of an unexpectedly hawkish inflation report by Bank of England Governor Mervyn King late Wednesday supported low volatility because it indicated further interest rate hikes are imminent. "The relative shift in interest rate expectations will continue to provide GBP/USD with support," strategists at BNP Paribas noted in a report, explaining this is due to U.K. interest rate expectations adjusting higher and U.S. rate expectations easing dramatically.
